There are plenty of reasons to invest in Airbnb (ABNB -0.33%).
The company has a near monopoly in home-sharing with an estimated 74% share of the market. It's generating gobs of free cash flow, and it's disrupting a travel industry valued at over $1 trillion.
However, one reason to own Airbnb you may not have considered is that, unlike most tech stocks, the travel stock can benefit when interest rates go up.
Image source: Airbnb.
A hidden revenue stream
When you make a booking on Airbnb, the company keeps that money until you arrive at your stay (and only then passing on the amount due to the host), and it earns interest on this money in the interim period by investing it in money-market funds and short-term, high-quality bonds. Airbnb reports this money as "amounts held on behalf of customers," and in the second quarter, it earned $20.2 million in interest income on it, finishing the period with $7.5 billion in funds receivable and amounts held on behalf of customers.
In other words, Airbnb earned roughly a 1% annual yield on that balance in the second quarter.
Since the second quarter ended, the Federal Reserve has continued to raise the benchmark fed funds rate, and treasury yields have responded in kind. The yield on a one-year treasury bill is now around 4.6% after hovering below 2% for much of the first half of this year, meaning investors should expect Airbnb's interest income to increase in the second half.
Data by YCharts.
An investment of $7.5 billion at a 4.6% yield would translate into $345 million in annual, risk-free profits going straight to the bottom line. Even for a company the size of Airbnb, that's a significant sum. By comparison, the company brought in $379 million in net income in its most recent quarter, a seasonably strong time of year. Better yet, treasury yields could move even higher as economists are predicting the Federal Reserve will hike rates 75 basis points at its meeting in early November and another 50 basis points in December.
Amounts held on behalf of customers are also likely to move higher in the coming years as the business grows, giving Airbnb greater potential to earn this interest income. Due to seasonality, however, amounts held on behalf of customers typically peak in the second quarter when users make their summer travel plans, so the company is likely to have modestly less than $7.5 billion to earn interest on in the second half of 2022.
A unique hedge among growth stocks
Airbnb's ability to generate interest income gives it a distinct advantage over other growth stocks and tech companies.
In general, rising interest rates have been problematic for these stocks, because they change the time value of money and make future profits worth less. That's part of the reason why so many growth stocks have crashed over the past year and why valuations have come down sharply in sectors like software.
Airbnb, on the other hand, can better navigate these headwinds, and given the scenario above with short-term treasury yields in the 4% range (and rising), the company could reap a windfall from higher rates.
Of course, investors are fearful rising rates could lead to a recession, which would likely hurt Airbnb since travel on the platform is largely based on discretionary spending. However, it's also possible the best-case scenario with interest rates plays out for the company.
Consumer spending has continued to be strong in spite of recession fears, and there still seems to be pent-up travel demand left over from the pandemic. Meanwhile, Fed Chairman Jerome Powell has indicated the central bank expects to raise benchmark rates to 4% to 5% and leave them there at least through the end of 2023 in order to cool off inflation.
If travel demand remains strong, Airbnb could see strong profits from its core business while also benefiting from record interest income. Considering the challenges that much of the tech sector faces in this environment, Airbnb looks like a no-brainer stock to own right now for growth investors.
